Page 7 - ISQ UK_October 2021
P. 7


                                                              The inexorable rise in energy costs, thrown into sharp relief by
                                                              the current crisis must, inevitably, result in the steady increase
              In truth, the global economy has been           in the cost of items perceived by households as essential. So,
              deteriorating for a very long time.             as the proportionate cost of these items increases, so overall
                                                              prosperity is trending downwards. This is important for a
                                                              stock market the vast majority of constituent businesses for
           In truth, the global economy has been deteriorating for a very
           long time. The term “secular stagnation” was coined in the   which have models based upon the supply of discretionary
           1990s, and with good reason. Whilst it might be tempting to   and non-discretionary goods and services. As the pressure
           take the view that ultra-easy monetary policy has boosted   on prosperity increases so, in addition, will come pressure
           global activity over the past dozen years, in reality, the size   on businesses models dependent on household income
           and complexity of the modern economy is the direct der-  streams. Rising costs associated with fractured supply chains
           ivation of the use of fossil fuels; oil, gas and coal. From the   are adding to building inflationary pressure beneath the sur-
           mid-1990s onwards, the cost associated with extracting   face and this is putting governments and central banks in a
           traditional energy sources has been on a relentlessly rising   bind.
           trend. Meanwhile, the window of “environmental tolerance”   Smug as one might feel, when charging one’s electric vehicle
           towards their use has been closing.                up at the power point (until the point when the cost of mate-
                                                              rials used in the manufacture of batteries becomes exorbitant
           This might not have been a problem had a fully “utilisable”
           replacement source of energy been available, coupled with a   too), the broader point is that the world is reaching the point
           willingness on the part of the authorities to adapt and adjust   where perpetual fiscal and monetary stimulus reduces
           the economy onto a new basis consistent with a radically   in its effectiveness and actually becomes dangerous as
           altered energy source. But neither has been the case. Wind   credit-based lifestyles, even for necessities, become unsus-
           and solar power cannot completely replace fossil fuel energy,   tainable. Central bankers may initiate the conversation about
           for three reasons.                                 tightening monetary policy, but in truth, they are trapped.
                                                              The cost of achieving short-term price stability is likely to
           Firstly, the creation, expansion and maintenance of the   result in more volatility therefore, a well-diversified portfolio
           infrastructure associated with renewable energy sources is   is vital.
           completely dependent upon materials whose supply is driven
           by legacy energy from fossil fuels. Secondly, overcoming the
           intermittence of wind and solar power requires batteries, a   KEY TAKEAWAYS:
           dependence which “ups  the  ante” against  seamless trans-  •  Inflation is likely to remain above target for longer.
           mission to an even greater extent. Thirdly, and perhaps most
           importantly, even accounting for the use of technological   •  The global economy faces testing economic chal-
           know-how, renewables are unlikely ever to deliver the energy   lenges, not all due to COVID-19.
           density to which two centuries of reliance on coal, oil and gas
           have led us to become accustomed. Sometimes there really   •  Energy prices will likely remain high.
           are no ways around the immutable laws of physics.       •  Volatility will continue.

           In the early days of the industrial revolution, the financial
           cost associated with the extraction of fossil fuel was incred-
           ibly low. However, as resource has diminished, so the cost
           of extraction has steadily increased, slowly at first but much
           more rapidly over the past three decades. It is this rapid
           recent acceleration, coupled with the recognition that the
           “energy cost” associated with renewables will never get
           down to the ultra-low levels of the late eighteenth and early
           nineteenth centuries, that lies behind secular stagnation. In
           short, the heretical assertion is that the world is not, and has
           never been, a financial system but rather an energy system.
           The current crisis makes this observation all the more telling,
           and the air is thick with the sound of chickens coming home
           to roost.

   2   3   4   5   6   7   8   9   10   11   12